The Valuation Hack: Family Limited Partnerships (FLP)
The Valuation Hack: Family Limited Partnerships (FLP)
How to turn $1.00 into $0.65 for tax purposes: Leveraging “Lack of Control” and “Lack of Marketability” discounts to slash gift taxes.
Executive Summary
- Consolidation: You transfer family assets (Real Estate, Stocks, Business Interest) into a Partnership. You keep the 1% General Partner (GP) interest (Control), and your heirs get 99% Limited Partner (LP) interest (Equity).
- The Discount Magic: Because LP shares have no voting power (Lack of Control) and cannot be easily sold (Lack of Marketability), the IRS allows you to discount their value by 25-40% for Gift Tax purposes.
- Creditor Protection: If an heir gets sued, the creditor usually cannot seize the underlying assets in the FLP; they only get a “Charging Order” against distributions, which the GP (you) can choose not to make.
The Section 2036 Trap
Fatal Mistake: If you use the FLP bank account to pay for your personal groceries or vacations, the IRS will invoke IRC Section 2036 (“Retained Interest”), ignore the partnership, and pull 100% of the assets back into your taxable estate. Treat it like a real business.
Mechanic: The Discount Stack
GP Control
1% Voting Power
LP Equity
99% Non-Voting
35% Off
Typical Discount
Charging Order
Legal Defense
Simulation: Transferring a $20M Building (Direct vs. FLP)
Taxable Gift Value Calculation
| Feature | Direct Ownership (Asset) | FLP Interest (Wrapper) |
|---|---|---|
| Liquidity | High (Can sell anytime) | Low (Cannot sell w/o GP) |
| Control | Owner has 100% control | LP has 0% control |
| IRS Valuation | 100% of Fair Market Value | ~65% of Fair Market Value |
“The rich don’t own assets; they own entities that own assets. The FLP creates a ‘legal wrapper’ that depresses the value for the taxman while preserving the value for the family.”
Essential Resources
INTERNAL
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